The year 2015 has been a phenomenal one for Malaysia, be it from the political, economic or social segment of the country. Surrounded by economic uncertainties, the Islamic banking and finance industry in Malaysia endured a challenging year. Nevertheless, the country itself has been able to maintain its composure and is still moving forward while preserving its spot as the center of the global Islamic banking and finance industry.
It remains to be seen how well the industry in Malaysia will perform in the coming year, while many are predicting the sluggishness of the economy will further obstruct the growth of Islamic finance. 2016 will be a year where support from regulators and the government will be as vital as ever in the resilience of the Islamic finance industry in Malaysia.
The year 2015 post-IFSA
The enactment of the Islamic Financial Services Act (IFSA) 2013 has further strengthened the governance of the industry as a whole as well as each Islamic financial institution as entities.
Islamic deposit products in Malaysia had to be revamped pursuant to this Act. The year 2015 witnessed the effective implementation of the Investment Account (IA) framework which created further innovation as well as greater distinction between conventional and Islamic finance. Islamic financial institutions were given a grace period to implement such enforcements, and by mid-2015, products based on the IA framework were introduced to the market.
The implementation of IFSA 2013 also brought about changes in the industry, for example, the inclination of structuring a demand deposit product based on commodity Murabahah by some Islamic financial institutions, whereby the idea of such a product was previously shrugged off due to higher costs incurred by the Islamic financial institutions. This type of product was launched recently this year and was the first of its kind in Malaysia.
As a result of such a new development in Islamic banking deposit products, it is expected that more Islamic financial institutions will follow suit in structuring other variant products which in turn will enable the industry to become more competitive under a strengthened governance law.
New Shariah standards
Bank Negara Malaysia (BNM) has been diligently rolling out policy documents in relation to Shariah contracts. These documents are issued in stages and upon finalization, the documents (referred to as the Standards) will be given an effective implementation date where all Islamic financial institutions must abide the Standards by then.
In 2015, two new Standards were issued, ie Musharakah and Mudarabah, where the Standards will come into effect on the 1st June 2016. These Standards are important for the strengthening of Shariah governance in legal documentation and the structuring of Islamic financial institutions’ products and services. Other Shariah contracts will be covered later once the current concept papers have been finalized.
The Standards also come with operational requirements set by BNM which will see Islamic products be more customer-centric, protecting the rights of customers from the Shariah-structuring point of view.
The impact of Malaysia’s 2016 budget on the Islamic capital market
In the spectrum of Sukuk issuance, Malaysia has been performing relatively well in contrast to the anticipated performance of 2015. Several corporations have indicated their interest in issuing Sukuk in the near future; these Sukuk may be targeted to be issued within the year or by 2016.
The prime minister of Malaysia recently presented the 2016 budget in the parliament, whereby the Islamic finance industry has yet again received support from the government in order to spur the industry. In the budget, the main highlight is the incentives given on issuing sustainable and responsible investment Sukuk whereby tax deductions were given on its issuance costs for five years. Other similar incentives were given to the issuance of retail Sukuk and on income from managing Shariah compliant funds.
EPF to set up Shariah compliant account
Another milestone in the industry is the amendment of the Employees Provident Fund (EPF) Act to complement the establishment of Shariah compliant accounts. The EPF announced that upon approval, there will be a dedicated Shariah compliant account created that will be provided as an optional account to members of the fund. Upon enactment of the amended bill, a Shariah committee must be appointed to oversee the upcoming dedicated Shariah compliant accounts. In general, by the size of the fund managed by the EPF, this move would further support the development of the Islamic capital market in Malaysia. The EPF is the largest social security institution in Malaysia which provides retirement benefits by investing the saving contributions of its members.
Although Malaysia has been tirelessly reinforcing the Islamic finance industry as can be witnessed in the year 2015, it is expected that the road ahead will be more challenging. Therefore, greater cooperation between the government, regulators and industry players will be pertinent to further develop, stabilize and attract more interest to this industry.
Ahmad Mukarrami Ab Mumin is the head of the Shariah Division at RHB Islamic. He can be contacted at [email protected].